Degree

Doctor of Philosophy (PhD)

Department

Finance

Document Type

Dissertation

Abstract

In this dissertation, I present three independent essays that contribute to the literature on stablecoins, the run-on stablecoin (Terra), and the information narrative surrounding the run. The first essay offers a comprehensive overview of the stablecoin ecosystem, the structural frictions that challenge peg maintenance, and the evolving regulatory landscape governing stablecoin issuance and use. In the second essay, I investigate the collapse of the TerraUSD (UST) algorithmic stablecoin and provide evidence that the collapse mimicked a run by demonstrating liquidity shortages on centralized exchanges. I show that Terra’s arbitrage mechanism broke on May 7, 2022, and that sustained price deviations from the $1 peg began only after the breakdown. Although arbitrage incentives were present, I further show that market depth across various centralized cryptocurrency exchanges deteriorated within hours after the arbitrage mechanism failed, leading to a run across major centralized exchanges. The paper uses a novel, high-frequency dataset of Terra DeFi transactions, tick-by-tick trades, and order book simulations, showing that the run ensued. This case serves as a cautionary tale on the fragility of algorithmic pegs under stress and provides microstructure-based evidence on Terra’s run. The third essay presents an information narrative of the run. Using high-frequency trade and sentiment data, I compute adverse selection for various cryptocurrencies. Following the arbitrage breakdown, I document a rise in adverse selection for Terra, significant capital outflows, and an increase in negative investor sentiment. The results enhance the run narrative by introducing an informational dimension. Together, these essays provide an overview of stablecoins and document that the Terra collapse mimicked a run. They offer new insights into the systemic vulnerabilities of arbitragedriven stablecoins and suggest that policy interventions focused solely on incentives must also account for real-time liquidity available in centralized exchanges to absorb external liquidity shocks.

Date

7-28-2025

Committee Chair

Rajesh Narayanan

DOI

10.31390/gradschool_dissertations.6886

Download

Share

COinS